New mortgage rules: don't let financial paternalism make a return

As a result of the Financial Conduct Authority’s review, most people will now
have to obtain help from an adviser before taking out a mortgage

New rules introduced by the Financial Conduct Authority (FCA) will require mortgage lenders to ask far more searching questions about the outgoings of would-be home buyers before any money is handed over.Photo: PA

On the face of it, closer scrutiny of whether borrowers can easily afford their mortgage repayments seems perfectly reasonable given the threat of interest rate rises and negative equity in a volatile housing market. New rules introduced by the Financial Conduct Authority (FCA) today will require lenders to ask far more searching questions about the outgoings of would-be home buyers before any money is handed over.

As a result of the FCA’s review, most people will now have to obtain help from an adviser before taking out a mortgage, to ensure that they can afford the repayments should there be a sudden rise in the cost of borrowing. But while this should not be done in a heavy-handed and bureaucratic way, it probably will be.

The time when lenders would exercise discretion on a case-by-case basis has been supplanted by a tick-box approach that will exclude people from the housing market without first establishing whether they can adjust their spending habits to meet the new criteria.

For first-time buyers struggling to raise a deposit (albeit with Treasury assistance), a detailed review of their expenditure is yet another hurdle at a time when mortgage approvals are declining anyway. For existing homeowners looking to re-mortgage, the arguments for such an intrusive approach are harder to justify, since they have an asset against which to borrow.

No one wants to see the free-for-all that landed the economy in such a mess six years ago but equally we want to avoid the sort of financial paternalism we thought had been banished with George Osborne’s pension reforms. People should be cautioned against reckless decisions but they must also be free to make their own mistakes. If these new rules are to work, they need to be applied sensibly.